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Entrepreneurship Strategies and Resource 4th

Strategies and Resources

Marc J. Dollinger
Kelley School of Business

Lombard, Illinois U.S.A.


n memory of Ken Marino, a great teacher, a wonderful colleague,
and a true friend.

EDITOR Libby Rubenstein
COPYEDITOR Shelia Whalen
TYPESETTER Phoenix Graphics, LLC
EDITORIAL SUPPORT Barbara Burwold, Thomas Serb

MANUFACTURER Sheridan Books, Inc.

Library of Congress Cataloging-in-Publication Data
Dollinger, Marc J.
Entrepreneurship : strategies and resources / Marc J. Dollinger. — 4th ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-9713130-6-4
1. New business enterprises. 2. Entrepreneurship. I. Title.
HD62.5.D65 2008

Copyright © 2008 by Marsh Publications LLC. All rights reserved under the International and Pan-American Copyright Conventions. No part of this publication may be reproduced, stored in a retrieval system,
copied, or transmitted in any form or by any means without written permission from the publisher. For
further information contact Marsh Publications LLC, 341 N. Charlotte St., Lombard, IL 60148-2037 USA.
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1

Preface vii
1. A Framework for Entrepreneurship 2
Entrepreneurship and the Future 4 What Is Entrepreneurship? 7 Where Is
Entrepreneurship? 12 Who Is the New Entrepreneur? 14 Diemsions of
Entrepreneurship 16 Paradoxes of Entrepreneurship 25 Organization of this
Book 26 A Final Word 27 Summary 28 Discussion Questions 28
Key Terms 29 Exercises 29 Discussion Case 30
2. Resources and Capabilities 32
Identifying Attributes of Strategic Resources 35 Resource Types 43 A
Psychological Approach 55 A Sociological Approach 55 Summary 60
Key Terms 61 Discussion Questions 61 Exercises 61 Exercises for Writing a
Business Case 62 Discussion Case 63 Appendix: Creativity and Idea
Generation 64
3. The Environment for Entrepreneurship 70
Schematic of the New Venture’s Environment 71 Processes of Business
Environment Analysis 73 Political and Governmental Analysis 78 Stakeholder
Analysis 82 Macroeconomic Analysis 83 Technological Analysis 84
Sociodemographic Analysis 87 Ecological Analysis 90 Competitive Analysis 91

Competitor Analysis 102 Summary 103 Key Terms 105 Discussion
Questions 105 Exercises 106 Discussion Case 107
4. Entrepreneurial Strategies 110
Entrepreneurship and Strategy 112 Business Models and Strategy 113 Entry
Wedges 116 Resource-Based Strategies 123 Isolating Mechanisms and FirstMover Advantages 125 Information Rules Strategies 129 Strategy and Industry
Environments 132 Crafting and Evaluating Strategy 144 Summary 148 Key
Terms 149 Discussion Questions 149 Exercises 150 Discussion Case 151
5. The Business Plan 154
Why Write a Business Plan? 158 Elements of the Business Plan 160 Critiquing
the Plan 175 Format and Presentation 177 Summary 180 Key Terms 181
Discussion Questions 181 Exercises 182 Discussion Case 182 Appendix:
Babyyourway.com Business Plan 183


6. Marketing the New Venture 206
The Marketing and Entrepreneurship Interface 208 Marketing Concept and
Orientation 299 Marketing Strategy 214 Marketing on the Internet 232 Sales
Forecasting 240 Summary 242 Key Terms 243 Discussion Questions 244
Exercises 244 Discussion Case 245 Appendix: Case Study: EMC Site
Expansion 246
7. Foundations of New Venture Finance 252
Determining Financial Needs 254 Sources of Financing 261 New Venture
Valuation 276 Legal and Tax Issues 282 Summary 291 Key Terms 292
Discussion Questions 292 Exercises 293 Discussion Case 293 Appendix: The
Initial Public Offering (IPO) Process 295
8. Securing Investors and Structuring the Deal 298
Approaching Investors 301 Structuring the Deal 309 Negotiation Skills 319
Summary 327 Key Terms 328 Discussion Questions 328 Exercises 328
Discussion Case 000 Appendix A: Sample Series A Preferred Stock Term Sheet 330
Appendix B: Investment Agreement Outline 333 Appendix C: Negotiable Terms to
a Financial Agreement 335
9. Creating the Organization 338
The Top Management Team 341 Building An Enduring Organization 351 The
Organization’s Boundaries 355 Networking and Alliances 357 Traditional
Organizational Structure 364 Entrepreneurial Performance: The Balanced
Scorecard 366 The Entrepreneurial Workplace 369 Most Successful Human
Resource Practices 373 Summary 376 Key Terms 378 Discussion
Questions 378

Exercises 379

Networking Exercises 379

Discussion Case 380

10. Intrapreneurship and Corporate Venturing 382
Intrapreneurship 384

Advantages and Barriers to Intrapreneurship 389

of Intrapreneurship 391 Intrapreneurial Strategies 398
Summary 407

Key Terms 407

Discussion Case 409

The Process

Guildelines for Success 404

Discussion Questions 408

Exercises 408

Appendix: The Franchising Alternative 410

Contents v


MedTrack 422
Rubio’s: Home of the Fish Taco (A) 442
Rubio’s: Home of the Fish Taco (B) 456
Rubio’s Restaurants, Incorporated (C) 466
Stamps.com: Maintaining a Leadership Position 475
Suzy’s Zoo 482
Tellme Networks: Dial Tone 2.0? 492
Master International Franchising in China: The Athlete’s Foot, Inc. 503
Biocon Ltd.: Building a Biotech Powerhouse 515
Software Innovation Inc. 528

Notes 541
Company and Name Index 563
Subject Index 572

Since the publication of the first edition of Entrepreneurship: Strategies and Resources, the
field of entrepreneurship has grown even faster than I would have predicted. There are
more courses and schools teaching entrepreneurship than ever. The major business periodicals, Business Week, Fortune, and The Wall Street Journal continue expanding their coverage of entrepreneurs and their companies. There are a number of publications that
rank graduate and undergraduate entrepreneurship programs. Business plan competitions at the graduate and undergraduate level continue to proliferate and the prizes get
larger and larger. International interest in new venture creation has grown exponentially. Programs in the United States and overseas have partnered to provide cross-cultural
and multinational entrepreneurial courses for their students. I personally participated in
one such effort between Indiana University and City University of Hong Kong. The
technology enabled us to form joint ventures between students in the United States and
Hong Kong for the purpose of starting businesses. It was marvelous.
In this fourth edition of Entrepreneurship: Strategies and Resources, I have tried to
improve upon the foundation set in the first three editions. This book is intended to be
friendlier to the user, beginning with its new design and soft cover. A number of features will help make the text easier to read and understand. Dozens of new examples and
minicases, called “Street Story,” have been added. International examples and applications are integrated throughout the book.
Entrepreneurship: Strategies and Resources is organized into three parts. Part I introduces
the major themes and theory of the book. Chapter 1 describes the roles that new venture
creation plays in the international economy, defines entrepreneurship, and shows how
three factors—individuals, environments, and organizations—come together to create
the entrepreneurial event. I also make a point of explaining that studying entrepreneurship cannot be done in a formulaic, by the numbers fashion.. It requires judgment.
Chapter 2 sets this textbook apart from others because it casts entrepreneurial phenomena in terms of the predictive theory of the resource-based framework. In this
chapter, I present the basic concepts and model of the resource-based theory. There are
six types of resources in our theory: financial, physical, technological, human, organizational, and reputational. The theory says that entrepreneurs can create sustainable
competitive advantage for their ventures when they possess or can acquire and control
resources that are rare, valuable, hard to duplicate, and nonsubstitutable. Here I
emphasize the importance of human resources, especially the entrepreneur. I then
explain how these resources are a source of profit and rent for the entrepreneur, and
how the new venture needs to protect these rents and profits through isolating mechanisms and first-mover advantages. The chapter also has an appendix that introduces
the basics of creativity as I believe that this is a personal resource that can be further
developed in all of us.


Part II of Entrepreneurship: Strategies and Resources describes the environment for
entrepreneurship. It presents the tools and techniques for analyzing business and competitive conditions, and for evaluating entrepreneurial opportunities. It is comparable to
the strategy formulation phase of corporate strategic management. The purpose of this
section is to show how the environment affects, directs, and impinges on the strategy
formulation problem in new venture creation. It does this in two ways that can be
expressed by the resource-based model: The environment helps determine what is rare,
valuable, imitable, and substitutable and it is the source of resources that possess these
four attributes. The strategy formulation problem in new venture creation can be stated
as follows: What configuration of resources will provide the new firm with the best
chances of achieving a competitive advantage?
Chapter 3 covers the aspects of the macro- and microenvironment that affect entrepreneurship and new venture creation. I present a process model for environmental
analysis and then describe a six-element model of the macroenvironment: political, stakeholder, economic, technological, sociodemographic, and ecological. . Next I offer the
elements of the competitive environment. I incorporate the Porter model (five-forces
model) into the analysis. I begin by asking two questions of utmost importance to the
entrepreneur in the early stages of new venture creation:
1. Is the industry the entrepreneur is about to enter an attractive one?
2. What are the best ways to compete to increase the chances of creating a high profitability venture?
To address the first question, the chapter depicts an industry’s profitability as a function of buyer and supplier power, the threat of substitutes, entry barriers, and the state
of interfirm rivalry. Students are shown how to do this analysis in sufficient depth and
with limited data by resorting to the basics of microeconomic theory. To address the second question, I discuss the ways that the possession and acquisition of the four-attribute resource base provide the entrepreneur with tools to overcome strong industry forces
and exploit weak industry forces. The resource-based model is incorporated into this discussion by demonstrating its applicability as a screening device for new venture ideas. I
create and describe a resource-based implementation matrix—the four attributes of sustainable competitive advantage by the six types of resources: financial, physical, technological, reputational, human, and organizational resources.
Chapter 4 presents types of new venture strategies and examines different positions
that entrepreneurs take regarding the resources required for their firms. I present the
basic entry wedges available to the new venture and develop the set of resource-based
strategies. I introduce the concepts of strategy for businesses-producing informationtype products. I look at how the industry life cycle influences strategy choice. New ventures can be created successfully across the life cycle, but each poses its special challenges.
The chapter concludes with an overview of strategic postures and orientations that entrepreneurs can take.
Chapter 5 presents the major tool for formulating and creating new ventures: the
business plan. It offers an in-depth outline for a business plan, including all the key sections and tips on how to structure the plan and the financial proposal for maximum
effectiveness. The chapter continues with a discussion of the criteria and techniques for

Preface ix

evaluating business plans. At the end of the chapter, there are proven tips for the format
and presentation, writing, and editing of successful business plans. A complete business
plan follows the chapter.
Part III of Entrepreneurship: Strategies and Resources makes the transition from the
formulation of entrepreneurial strategy to the implementation stage. The section covers
marketing, financing, and organizational issues. The final chapter in the book covers
some special topics that students might need as they work their way through the course.
These are intrapreneurship and franchising.
Chapter 6 is the marketing chapter. It introduces the basics of marketing for a new
venture. I cover customer orientation, selection of segments and the basics of segmentation, the primary marketing activities, and the special problems of marketing on the
Internet. The chapter concludes with a treatment of the problems and issues of sales
forecasting. The appendix to Chapter 6 offers an example of sales forecasting using the
market potential/sales requirements technique.
Chapter 7 introduces the elements of entrepreneurial finance. It discusses how
financial resources can and cannot be a source of advantage for the new venture. Then
we show how the venture can determine its financial and cash flow needs. After reviewing the types and sources of potential financing, I present three methods of new
venture valuation. The chapter has an appendix: a brief introduction into the process of
going public.
Chapter 8 shows how entrepreneurs actually obtain investors and structure the
financial deal. It looks at the characteristics of various types of investors and how
to appeal to their needs. The basic elements of the deal structure are presented, and
then more advanced elements, such as phased financing and the use of options, are
introduced. I have a new section on negotiation skills in this chapter. The chapter concludes with a review of the legal and tax issues raised by seeking outside investors. This
chapter has three appendices: an outline of a term sheet, a description of a typical
investment agreement, and a description of the negotiable terms to a financial
Chapter 9 examines the creation and development of the organization. It begins
with a discussion of the top management team and provides guidelines for effective top
management processes. I do the same for boards of directors. Then I discuss the design
of the new venture, including alliances and partnerships. I offer the research and recommendations from Collins and Porras’s Built to Last. I feel that the time to begin to think
about building an enduring organization is right at the start of the venture, and the Built
to Last concepts provide great insight into the entrepreneurial problem. I also offer an
introduction to the dimensions of the balanced scorecard. I explore these in the context
of entrepreneurial performance and show that performance is not just financial, but a set
of indicators across four dimensions. The balanced scorecard can be a system of management for the entrepreneurial TMT. Last, I offer a vision of the entrepreneurial workplace. I discuss how culture, ethics, and personnel practices can help make organizations
unique and therefore provide a competitive advantage.
Chapter 10 discusses intrapreneurship—the factors that lead to successful intrapreneurship and those that hinder large corporations from being entrepreneurial. This topic
may be assigned if students require an introduction to it to enable them to do their proj-


ects, or if the course has a corporate component. I cover the issues of Innovator
Dilemma and Innovator Solutions. A new addition to this chapter reviews the basic concepts of Blue Ocean Strategy. This important new book offers a method and process for
evaluating the current situation for corporate products and a process to find less competitive but profitable positions. The chapter concludes with an appendix that covers the
foundations of franchising. Again, this can be assigned if the student projects need a
basic treatment of the subject or if the instructor has a franchising component in the
class design.
Note from the author. I recently read a very good book: Deirdre McCloskey, The
Bourgeois Virtues (Chicago: University of Chicago Press, 2006) and came across this
quote in it.
“Courage plus prudence yields enterprise.”

I think this sums up my approach in the book. Entrepreneurs require courage. They
require the courage of their convictions, of their assumptions and the courage to risk
money and time to pursue their ventures. But courage without prudence is too dangerous to encourage. Prudence requires thoughtful analysis, getting information, asking the
views of others, and weighing the gains available against the costs incurred.
I wish you all both courage and prudence.
The fourth edition of Entrepreneurship: Strategies and Resources provides several features
that are designed to aid the learning process:
• Chapter outlines at the beginning of each chapter inform the students of what they

should know about entrepreneurship when they complete the reading.

• Chapter objectives are a blueprint of concepts the student should understand upon

completion of the chapter.

• Theory-based text enables the student to analyze, evaluate, and predict the

prospects for various business concepts and plans, and make recommendations that
increase the venture’s chances.
Practical applications and guidelines are offered in all the chapters to show the
student how to deal with the real world of entrepreneurs, markets, and competitors.
Street Story is the name of our boxed series of minicases. Each chapter contains
these real-life examples drawn from the pages of the business press. Each Street
Story illustrates the application of good theory to everyday new venture creation.
Tables and figures throughout the book help illustrate difficult points and summarize the material for the student.
Extensive references at the end of each chapter provide documentation for all of
the arguments offered and enable the student to follow up with additional reading.
End-of-chapter case and questions provide the basis for stimulating discussion.
Adapted from real situations described in the business press, these short cases are
provocative illustrations of what can go right and what can go wrong in the process
of new venture creation.
Key terms are listed at the end of each chapter so that the student can be familiar
with the language used in the field of entrepreneurship.

Preface xi

• Chapter discussion

questions can provide the basis of classroom debate and be
used for written assignments.
Chapter exercises are designed for two purposes. The first is to aid the student in
the development of his or her own business plan. The exercises guide the students
to complete the portion of their plan covered in the chapter. Chapter exercises can
also be used to complement the classroom experience by having the student go out
into the business community to observe entrepreneurship first hand.
End-of-text cases provide an in-depth learning exercise for the student. I have prepared 10 cases for analysis. The cases deal with the problems and opportunities of
new venture creation, of securing resources, of building reputations, and of operating in a competitive market. The instructor’s manual offers a comprehensive teaching note for each case.
Name and subject indexes at the end of the book aid in finding topics and key
people and companies.
State-of-the-art design makes the book more readable and enhances learning.

First I wish to thank my new publishers, Libby Rubenstein and Stephen Ferrara of
Marsh Publications. Their support and encouragement has been very much appreciated. They are consummate professionals and best of all, have become my friends.
I have been fortunate to work for a very understanding dean, Dan Smith, and a
number of department chairs: Patricia McDougall, James Wimbush, and Idalene
Kesner, who have supported my efforts. I would also like to acknowledge the fine professors who teach in the entrepreneurship program at Indiana University: Jeff Covin,
Joe Denekamp, Don Kuratko, and Dean Shepard.
The most important thank you goes to my wife and partner Mimi. She contributed
a great deal to the book and helped with the organizing, writing, editing, and proofreading. She had great enthusiasm for the project and that kept me going.
Finally, I would like to thank my students and the many reviewers and adoptors of
this edition and the past editions. I offer a special thank-you to the following reviewers
of this edition, whose incisive comments about the manuscript were invaluable to me as
I revised the book:

Eugene F. Fregetto, University of Illinois at Chicago
Lindle Hatton, California State University at Sacramento
Patrick Kreiser, Ohio State University
Richard Arend, University of Nevada at Las Vegas
Frederick Crane, Northeastern University

I have tried to incorporate all of your many helpful suggestions and comments. All
errors of commission and omission are my own alone.

Marc Dollinger
Indiana University
March 2007

Strategies and Resources




A Framework for

“Twenty years ago students who dared to say they wanted to start their own companies would be sent for
counseling. Today entrepreneurship is the fastest-growing course of study on campuses nationwide.”
—Jerome Katz, professor of management, St. Louis University

Entrepreneurship and Your Future
How Does the “New
Entrepreneurship” Add Up?
What Is Entrepreneurship?
Creation and Innovation
Control and Deployment of
Economic Organization
Risk and Uncertainty
Where Is Entrepreneurship?
Economic Growth and Freedom
Who Is the New Entrepreneur?

Paradoxes of Entrepreneurship
Intelligence Paradox
Barriers to Entry Paradox
Organization of the Book
A Final Word

Dimensions of Entrepreneurship
New Venture Creation
Analysis Opportunity
The Individual
The Environment
The Organization

After reading this chapter, you will understand

• how entrepreneurship may affect your future, whether you’re an employee, a venture cre•


ator, or a consumer.
how to define entrepreneurship.
that entrepreneurship is a worldwide phenomenon.
how the concept of a new entrepreneur has emerged.
that entrepreneurship is a multidimensional concept.
the paradoxes of entrepreneurship.

A Framework for Entrepreneurship 3


Entrepreneurship with a Purpose
She was well on her way to the top of the
corporate game—a senior vice president for
a high-tech firm with a successful 14-year
career including stints at 3Com (formerly U.S.
Robotics) and IBM.
But Cheryl Mayberry McKissack wasn’t
happy; in fact, she was stressed out.
McKissack realized that what she really wanted was a job in Chicago with flexible hours
that would also give her an opportunity to
work with other African-American women. “It
was clear to me that it would be difficult, if not
impossible, to craft the perfect job, unless I
did it myself,” McKissack says. “I really wanted to use my technological expertise, but in a
different way than I had before. And I wanted
it to have a community element that I hadn’t
had the opportunity to pursue.”
McKissack came up with not one, but two
interrelated entrepreneurial solutions. Both of
them take their names from nia, the Swahili
word for “purpose.” In 2000, McKissack
founded Nia Enterprises, a market research
and services firm that uses Web-based tools
to provide online consumer research, delivering insights into the buying habits and consumer preferences of the U.S. ethnic group
with the largest buying power: AfricanAmerican women and their families. The
firm’s corporate clients include General
Motors, Sears, Disney, American Airlines,
Revlon, and State Farm Insurance.
That same year McKissack and Bonita K.
Coleman, an automotive marketing and brand
executive, also created an online community
for African-American women with a Web site
called NiaOnline™. They structured the site
to become the premier Internet destination for
African-American women by offering articles
on women’s health, careers, fashion, relationships, travel, and entertainment topics, with a
special focus for their target audience. In
addition, the site featured columns with

“empowering advice” from other AfricanAmerican women. The site claims to reach
an online community of more than 100,000
black household members.
More important, NiaOnline is the vehicle
for much of Nia Enterprises’ market data collection. Web site users can “opt-in” to sample and evaluate products provided by manufacturers. They can voice their opinions
through simple quick-response surveys. Or
they can register for the Consumer Advisory
Panel, where they agree to take surveys or
participate in online focus groups, and are
then rewarded with points that can be
redeemed for merchandise, such as photo
albums or briefcases.
McKissack, who received an MBA from
Northwestern’s J. L. Kellogg School of
Management, got some help for starting her
ventures from Springboard Enterprises, a
national not-for-profit that educates, showcases, and supports women entrepreneurs
trying to start high-growth potential enterprises. One of Springboard’s most effective programs has been their Women’s Venture
Capital Forum, which gives fledgling women
entrepreneurs access to sources of equity
funding while providing an environment
where they can refine their business strategy.
McKissack was one of the 25 women selected for the first Springboard Forum in January
2000 at the Kellogg School. Since that time
more than 350 women entrepreneurs have
presented at more than 15 additional forums
across the country, where they have raised
over $3 billion for their ventures.
While McKissack notes that minorities are
“frequently left out of the networks that provide the best advancement opportunities,”
she has obviously bridged the gap in her own
career. Her marketing firm and Web site
have helped her to reach her personal goal
while she achieves her purpose of helping


other African-American women. In addition to
starting these businesses, McKissack has cowritten three “Nia guide” books on careers,
balance, and health, and serves on several
corporate boards. She also shares what she
has learned with aspiring entrepreneurs by
teaching at the Kellogg School of Business at
Northwestern University in Chicago.

SOURCE: Adapted in part from Louise Witt. “What’s
the Right Time to Become an Entrepreneur?” Fortune
Small Business,, 2005. Retrieved from the Web February
1, 2005. http://www.fortune.com. Also, Cheryl Mayberry
McKissack, “Practice: Funding and Hiring for Women
and Minorities: The Challenges of Access and Inclusion,”
Kellogg World Alumni magazine, Winter 2004. Retrieved
from the Web May 8, 2006. http://www.kellogg.northwestern.edu.



the new millennium, the ideas, talents, skills, and knowledge that promote entrepreneurship are evident in people all around the globe, but especially in today’s
generation. This new direction is a change from previous times when the forces for
economic growth tended to favor more established businesspersons from the corporate
world. But the face of the world economy has shifted, and young people today are well
suited for entrepreneurial activity. For instance:

• The aspiring entrepreneurs of today are technologically precocious. They are com-

fortable with new technologies and are not fearful of change and the radical shifts
that new technology can bring. Younger people are at home with computers and all
sorts of consumer electronics. Over 80 percent of homes with children have computers and access to the Internet. A Carnegie Mellon study found that children and
young adults are the authority on computer technology in the home.1 Adults take a
back seat to the kids. Even beyond their technical competency, young people are
immersed in technology and have internalized its power.
“It’s a great time to be an entrepreneur,” especially an Internet one. Compared to
ten to fifteen years ago, hardware is 100 times cheaper, infrastructure software is
free, there is easy access to global labor markets, and SEM (search engine marketing) has changed distribution and selling tactics.2
This generation is passionate, inquisitive, and challenging. They welcome change
and embrace the idea of progress. They have seen the improvement of information
technology, new medical and biotech processes and products, and radical changes in
the way people communicate and work. They believe that continued improvement
and even revolutionary change await them in the future.
They think differently. As Fast Company puts it, “Forget the experience curve. The
most powerful force in business today is the inexperience curve. Young companies,
born on the right side of the digital divide, are running circles around their older,
richer, and slower rivals. If one wants his or her company to think outside the box,
why not learn by working with people who don’t know there is a box?”3 For example, Youtube.com began business without “knowing” it was a business. The
founders created a Web site for videos, which developed into a business. Recently,
the founders sold their interests for well over $1 billion.
They are independent. More and more people starting out in professional business
careers consider themselves free agents. They have portable skills and will take them

A Framework for Entrepreneurship 5

wherever they can do the most good or make the most money. These workers are
international free agents and show little loyalty to companies that continue to make
strategic mistakes or fall behind the market.

How Does the New Entrepreneurship Add Up?
The sum of these trends is more entrepreneurship and business start-ups for younger
people. Many new ventures will be technology based. The traditional career path may
become a rarity.4
Today’s younger people are more entrepreneurial than those of any previous generation. More and more people are striking out on their own. According to the Opinion
Research Council, 54 percent of 18- to 24-year-olds are highly interested in starting a
business, compared with 36 percent of 35- to 64-year-olds.5 A US News survey found
that “entrepreneur” was the preferred career of Generation X.6 A Newsweek poll asked
“millenials” (people who have come of age within a few years of the millennium) to
name their hero, and more than half named Bill Gates, the founder of Microsoft.7
In fact, most teenagers entering college know more about business than their parents
ever did. Many more teenagers work today than their parents did at their age. According to the Bureau of Labor Statistics, more than half the teens in the United States have
jobs and over 90 percent have summer jobs.8 Many high school students belong to
investment clubs and Junior Achievement and help raise money for charities through a
variety of businesslike activities. Ever buy a Girl Scout cookie? Harvard University recently struck down a long-standing ban on operating businesses out of dorm rooms because they feared losing student entrepreneurs to Stanford or Columbia. Vanity Fair
magazine has coined a new word—“enfantrepreneurs.”9
Today’s students and their peers (entrepreneurs or enfantrepreneurs) will take us into
the future. It is only a matter of time before their entrepreneurial activity brings the
innovations that will shape the new millennium. The spirit of entrepreneurship—the
notion of human progress, development, achievement, and change—motivates and
energizes people.
Innovations in the way we work and play, travel and eat, start our families, and raise
our children all create opportunities for entrepreneurs to build businesses and organizations that will exploit new technology and trends. We can also say that entrepreneurship is a self-perpetuating phenomenon: If a society has it, more is likely to
come. For example, Hong Kong is often cited as an example of a very entrepreneurial
place. Even after the handover of Hong Kong to the mainland Chinese in 1997, it has
remained entrepreneurial. However, most of western and central Europe has not been
entrepreneurial throughout history and many years of government programs designed
to correct this have not proved effective. In the United States, we have vast and growing entrepreneurial resources, as demonstrated by the tremendous increase in supply and
demand for entrepreneurship classes and programs on campus.
An estimated 2,000 two- and four-year colleges now have entrepreneurship courses
or programs. Universities and business schools have discovered that the entrepreneurship program has enormous potential for raising the school’s profile and visibility, promoting economic activity and job creation, serving highly motivated students (who may
be wealthy alumni one day), and engaging already rich and successful alumni.


Look at Mark Cuban, for example. He is the billionaire owner of the Dallas
Mavericks basketball team and co-owns HDNet (high definition TV). He took his first
entrepreneurship class at Indiana University’s Kelley School of Business and says it was
one of the best classes he ever took. “It really motivated me. There is much more to
starting a business than just understanding finance, accounting and marketing. Teaching
kids what has worked with startup companies and learning about experiences that others have had could really make a difference. I know it did for me.”10
Michael Guerrieri would agree. He is a recent graduate of the University of Chicago
Graduate School of Business. Guerrieri went back to school to change careers. He credits his MBA experience with giving him the confidence to start his own business, the
quantitative skills needed for advanced analysis, and the network of people who gave
him advice. He has two ventures in progress: a private label health food snack line, and
a medical services business that will automate refilling prescriptions. “It is one thing to
dream and another to execute it,” he says.11
Of course, not every entrepreneur is made in the classroom. Some believe entrepreneurs are born with special personalities and characteristics that distinguish them from
ordinary folks. Many feel that entrepreneurship cannot be taught at all, or that successful entrepreneurship is a function of luck or congenital “smarts.” “I don’t think in a million years you can teach it in the classroom,” said Paul Fleming, founder of P. F. Chang’s
China Bistro.12 But the fact is that students who take entrepreneurship classes have more
successful business start-ups than those who don’t. They also make fewer business mistakes and earn higher annual incomes. Moreover, the business and social networks that
schools create and sustain to put students and entrepreneur-alumni together help the
nascent entrepreneurs make connections. And school is a safe place to learn: Missteps in
a classroom setting can cause a little embarrassment and affect one’s grade, but they will
not likely result in years of hard work, money, and loss of personal reputation.13
A former best-selling book, Workplace 2000, argued that entrepreneurship not only
affects our lives through innovation but also represents the working future for many of
us.14 As large corporations continue to lay off middle managers to realize their goals of
flatter, more responsive organizations, these middle managers must “go”—and the place
they will go is into business for themselves. What will they do? They will fill the niches
and markets of servicing their former employers—providing consulting, aftermarket
service, and other support functions. These former middle managers will operate small
entrepreneurial firms that provide high quality and value to their customers in a way that
working inside the bureaucracy of a large corporation makes impossible.
There are other entrepreneurial alternatives as well. In a business environment where
large corporations try to stay flat, lean, and responsive, a burst of growth is occurring in
“micro-business” firms—firms with four or fewer employees. Some of these will be
started by former middle managers and executives who have been let go. Some are started by current managers trying to beat the clock to the next wave of layoffs. Many are
created by people who have never and will never work for Fortune 1000 companies. In
addition to micro businesses, there are more corporate-backed ventures: spin-offs, joint
ventures, intrapreneurial (corporate-based new ventures) units, and partnering arrangements. Although these types of ventures originate in larger organizations, they are being
formed now specifically to stay small and entrepreneurial, to avoid bureaucracy, and to
maintain their innovative edge.

A Framework for Entrepreneurship 7

Older people are also participating in a great wave of entrepreneurship. These people
are the “silver entrepreneurs.” Many corporate middle managers have left the ranks of
the white collared to join the self-employed (voluntarily and through redundancy).
Some are previously retired. A recent Business Week Online special report called “Second
Acts” described the action. Tom Washburn was a researcher for a financial services company. After a year of study, he opened his own ice cream shop, which he named Moxley’s
after the family dog. Today he has three Baltimore locations and an award-winning ice
cream brand. “My dream came true,” he says. Amy Hilliard left a 20-year career as a
marketing executive focused on consumer brands. She took a big risk as a single mother of two (she also has a Harvard MBA) to invest $300,000 in a cake-baking business.
(Have a look at her business at http://www.comfortcake.com.) Hilliard concludes, “I
didn’t realize how hard it would be. Food is a very complex business. But it is gratifying to create something from scratch. It is never boring. Every day is something new,
and I’m using all of my cylinders at once.”15
Not all older entrepreneurs are constrained by technology and to entering the food
and beverage industry. Many have discovered eBay, and they dig long and deep for treasure to be sold online. Selling on eBay helps these silver entrepreneurs earn extra cash and
clean out their closets too. Marcia Cooper and Harvey Levine started an eBay selling
business as 60-somethings. It was a low entry barrier situation because all they needed
was a computer and an Internet connection. They went through the eBay training program and decided to specialize in event tickets. Then they expanded to sell just about
anything, indiscriminately. Now they focus on quality items that yield a minimum of
$100 in commissions.16
We really do not need to be a futurist, however, to see that entrepreneurship plays a
large and increasing role in the future of our nation’s and our individual working lives.
The nature of organizations, work, and employment has changed, and individuals who
recognize these changes and prepare for them will be best able to succeed in the new
environment. Therefore, most people will encounter entrepreneurship through the marketplace, in new products, services, or technologies, or through their own employment.
The better they understand the marketplace, the better they will be able to survive and
thrive in the new entrepreneurial environment. Entrepreneurship is and will remain a
normal, regularly occurring opportunity in everyone’s professional career.
Before beginning our journey through the entrepreneurial adventure, let’s listen
closely to someone who has already been through the process—more than once. Steve
Jobs gave a commencement address to Stanford University’s graduates in the spring of
2005, and Street Story 1.1 summarizes his words and thoughts.

There have been almost as many definitions of entrepreneurship as there have been writers on the subject. Translated from the French, entrepreneur literally means “one who
undertakes.” An entrepreneur is a doer. But what does this mean with respect to the
businessperson? Some suggest that trying to define entrepreneurship may be fruitless
because the term is too vague and imprecise to be useful.17 Table 1.1 provides a short
selection of definitions that have been offered.



Lessons for the Hungry and Foolish
Steve Jobs, CEO of Apple Computer and
Pixar Animation Studios, began his commencement address at Stanford University by
admitting he was a college dropout.
Jobs not only confessed that he dropped
out of Reed College after just six months, but
added that he doesn’t regret it. In fact, when
he looks back on his diverse but connected
experiences (which explain how he got where
he is now), Jobs sees leaving school as “one
of the best decisions” he ever made. Doing
so enabled him to stop spending his adoptive
parents’ carefully saved money on education
at a time when he had no idea how he might
use that education, and allowed him to informally sit in on courses that interested him
instead of enrolling in required courses that
bored him.
One of the courses that interested Jobs
was calligraphy. Learning how to create beautiful letters didn’t seem like a very practical
skill at the time, but ten years later, when he
was developing the first Macintosh computer,
Jobs drew on that calligraphy experience to
incorporate multiple typefaces and proportionally spaced fonts as two of the Mac’s most distinctive features. His competitor, Microsoft,
was then quick to add those elements to its
Windows operating system.
As Jobs reflected in his Stanford speech, “If
I had never dropped out, I would have never
dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do.” The life lesson
he extracts from this experience is that individuals must be willing to trust their gut instincts
when they make choices, and believe that
those choices (or “dots”) will somehow connect to their future.
A second experience that Jobs shared with
Stanford grads that day was that after building
Apple into a $2 billion enterprise in just ten
years, he was fired by the company’s board of
directors. While he was understandably dev-

astated at the time, Jobs now calls this “the
best thing that could ever have happened to
me” because it “freed me to enter one of the
most creative periods of my life.” Within five
years Jobs started both the NeXT company
and Pixar Animation Studios. Apple purchased NeXT, and Jobs returned to the company that had fired him. He now oversees
what he calls Apple’s current renaissance,
based on the NeXT technology.
Jobs calls this a “love and loss” life lesson;
he continued to do the things he loved after
he lost his job, and that passion enabled him
to reach a new pinnacle in his career. Jobs’
advice to grads is also appropriate for aspiring
entrepreneurs. He said that “work is going to
fill a large part of your life, and the only way to
be truly satisfied is to do what you believe is
great work. And the only way to do great
work is to love what you do. If you haven’t
found it yet, keep looking. Don’t settle.”
The third life lesson Jobs spoke about that
day is what he calls a death lesson. In 2004
he was diagnosed with pancreatic cancer, and
told he had three to six months to live. Then
the doctors discovered that his tumor was
actually a rare form of the disease that is curable by surgery. Now that he is cancer free,
Jobs wants everyone to “have the courage to
follow your heart and intuition. Our time on
earth,” he reminds us, “is limited.”
In his closing remarks, Jobs reminisced
about The Whole Earth Catalog, a publication
from the 1960s and 1970s, which he
described as a kind of “Google in paperback.”
The catalog’s farewell advice, printed on the
back cover of the final issue, was “Stay
Hungry. Stay Foolish.” Jobs says this is
something he has always wished for himself,
and something he would wish for new college
It’s a good motto for entrepreneurs, too.
SOURCE: Jobs’ commencement address was reprinted in
Fortune, September 5, 2005: 31–32.

A Framework for Entrepreneurship 9

TABLE 1.1 Definitions of Entrepreneurship

Knight (1921)
Schumpeter (1934)

Hoselitz (1952)
Cole (1959)
McClelland (1961)
Casson (1982)
Gartner (1985)
Stevenson, Roberts, &
Grousbeck (1989);
Barringer & Ireland
Hart, Stevenson,
& Dial (1995)
Shane & Venkataraman
Kuratko & Hodgetts
Allen (2006)

Profits from bearing uncertainty and risk
Carrying out of new combinations of firm organization—new products,
new services, new sources of raw material, new methods of production,
new markets, new forms of organization
Uncertainty bearing...coordination of productive resources... introduction
of innovations and the provision of capital
Purposeful activity to initiate and develop a profit-oriented business
Moderate risk taking
Decisions and judgments about the coordination of scarce resources
Creation of new organizations
The pursuit of opportunity without regard to resources currently

The pursuit of opportunity without regard to resources currently
controlled, but constrained by the founders’ previous choices and
industry-related experience
A field of business seeks to understand how opportunities create
something new…
A dynamic process of vision, change and creation…
A mindset or way of thinking that is opportunity focused, innovative and
growth-oriented. Can be found in large corporations and socially
responsible not-for-profits…

SOURCE : F. Knight, Risk, Uncertainty and Profit (Boston: Houghton Mifflin, 1921); J. Schumpeter, The Theory of Economic
Development (Cambridge, MA: Harvard University Press, 1934); B. Hoselitz, “Entrepreneurship and Economic Growth.” American
Journal of Economic Sociology, 1952; A. Cole, Business Enterprise in Its Social Setting (Cambridge, MA: Harvard University,
1959); D. McClelland, The Achieving Society (New York: John Wiley, 1961); M. Casson, The Entrepreneur (Totowa, NJ: Barnes
and Noble, 1982); W. Gartner. “A Conceptual Framework for Describing the Phenomenon of New Venture Creation,” Academy of
Management Review 10, 1985:696–706; H. Stevenson, M. Roberts, and H. Grousbeck, New Business Venture and the Entrepreneur
(Homewood, IL: Irwin, 1989); M. Hart, H. Stevenson, and J. Dial, “Entrepreneurship: A Definition Revisited,” Babson Frontiers of
Entrepreneurship Research, 1995; S. Shane and S. Venkataraman, “The Promise of Entrepreneurship as a Field of Research,”
Academy of Management Review 25, 2000:217-226; D Kuratko,and R. Hodgetts, Entrepreneurship, 6th ed. (Mason, Ohio:
Thompson-Southwestern, 2004); B. Barringer and D. Ireland, Entrepreneurship (NJ: Prentice-Hall, 2006) and K. Allen, Launching
New Ventures (Boston: Houghton Mifflin, 2006).

Within these definitions, we might find the following common elements and characteristics:

Creativity and innovation
Resource identification, acquisition, and marshaling
Economic organization
Opportunity for gain (or increase) under risk and uncertainty

Entrepreneurship, then, is the control and deployment of resources to create an innovative economic organization (or network of organizations) for the purpose of gain or
growth under conditions of risk and uncertainty.18 What are the implications of this definition?


Creation and Innovation
The term creation implies a founding and an origin. Therefore, technically speaking, the
purchase of an existing firm or its transfer to new owners does not represent entrepreneurship. As one group of authors point out, if founding was the only criterion for
entrepreneurship, then neither Tom Watson of IBM nor Ray Kroc of McDonald’s would
It is rare for an organization to change ownership without a change in its management and resource configuration; however, the degree of change and innovation determines whether entrepreneurship is present. To see how large a change is needed, we
can rely on Schumpeter’s categories of “new combinations.”19 Is:

A new product or service offered?
A new method or technology employed?
A new market targeted and opened?
A new source of supply of raw materials and resources used?
A new form of industrial organization created? (This is, perhaps, the rarest of all

Now we can see how Watson and Kroc can reapply for membership in the entrepreneur’s club.

Control and Deployment of Resources
The foundation for this book is the resource-based theory (or view) of sustained competitive advantage.20 This theoretical framework originally derives from the viewpoint
of a large corporation.21 The resource-based theory is the most appropriate to understand new venture creation because it best describes how entrepreneurs themselves build
their businesses from the resources and capabilities they currently possess or can realistically acquire. Successful entrepreneurship is not simply an analytical exercise. Industry
and competitor analysis—the application of the theory of industrial organization economics—alone is insufficient. The resource-based theory argues that the choice of which
industry to enter and what business in which to be is not enough to ensure success. The
theory says that the nature and quality of the resources, capabilities, and strategies the
entrepreneur possesses and can acquire can lead to long-term success. In fact, one can
argue that choosing the resources for a firm, configuring these resources into a consistent strategy, and deploying the resources (implementation) are the quintessential entrepreneurial acts.22

Economic Organization
The term economic organization means an organization whose purpose is to allocate
scarce resources. An economic organization can be a firm, a business unit within a firm,
a network of independent organizations, a social network, or a not-for-profit organization (NPO).23 Though it may seem paradoxical, even governments can create entrepreneurial organizations under the right conditions.
The business organization can, of course, pursue gain and growth as its motivations.
In fact, some firms use both profit and size as their main objectives.24 Other businesses

A Framework for Entrepreneurship 11

do not seek growth, which distinguishes entrepreneurial firms from small businesses.25
Do NPOs seek gain and growth? You bet they do. Although NPOs may be prohibited
by law from making profits for stockholders, they are allowed to accumulate surpluses
in their accounts. NPOs certainly seek growth: More members, more services performed, more clients served—the list may be endless. Our collective agreement that all
of these organizations can be examples of entrepreneurship illustrates the ubiquitous
nature of entrepreneurship and contributes to its vague and imprecise definitions.
A relatively new phenomenon in entrepreneurship is the creation of the virtual
organization. A virtual organization is a network of independent organizations fulfilling core functions “as if ” they were operating within the framework of a single company. For example, let us say that we are starting a company to manufacture and distribute canoes. But our primary expertise is in designing the boats—like Walden Kayaks. We
could raise the money and recruit the top managers to do everything in-house. Or we
could contract with a manufacturer, a distributor, a marketing organization (for promotion), an accounting firm, and a legal firm. None of these other organizations is within
our absolute control, yet each will perform “as if ” it were because of its contracts and
incentives. This is a virtual organization. The advantages are that everyone does what
they are best at. The disadvantages are that there are extra communication and control
costs, and each organization carries its own overhead.26

Risk and Uncertainty
Entrepreneurship exists under conditions of risk and uncertainty. The two terms are not
the same. Risk refers to the variability of outcomes (or returns); if there is no risk, the
returns are certain. A firm operating in a risk-free environment would continue to expand forever, because a negative outcome could not occur. Therefore, risk is a limit to
ever-expanding entrepreneurship.27 Risk can also be measured quantitatively by using
statistics that measure dispersion, like the variance and the standard deviation.
Uncertainty refers to the confidence entrepreneurs have in their estimates of how the
world works—their understanding of the causes and effects in the environment. If there
is no uncertainty, the environment and future can be perfectly known. If the future can
be known, then everyone can know it (at least for a price), and it will not be a source of
lasting profit for anyone. Uncertainty is what makes markets and poker games. Who
would continue to place bets on a hand if all the cards were face up?
There are three types of uncertainty.
1. State uncertainty is the lack of knowledge about current conditions. The world is a
big place and no one can know all the information of all the elements in it. There is
uncertainty about which technologies will prevail. Demand for a new product is highly uncertain. Sometimes there are simply no data. For example, in China there is currently a lack of statistical information about employment, income, growth rates,
entrepreneurial start-ups, and productivity gains. No one has this data. It has never
been collected and even if it existed, it would likely be a government secret.
2. Effect uncertainty is the lack of knowledge of cause and effect. Even if we can somehow identify and know all the elements in a complex situation, we frequently will not
understand the cause and effect relationships. Which comes first, the chicken or the


egg? Is a business successful because it has targeted psychologically satisfied customers, or are the customers satisfied because the business is successful? In a laboratory situation, we can do experiments to determine causality, but in the messy real
world these experiments are impossible. We often just substitute correlation for
causality—but this is a logical error.
3. Response uncertainty is not knowing what the response will be to some action.
Related to effect uncertainty, here we have uncertainty about what kind of responses
our actions will provoke. In some business cases, expanding the product line will
cause competitors to expand theirs as well. In other cases, the competitors might simply ignore the expansion. They may think that the core business is suffering and that
any new offerings are a desperate attempt to save the business. With response uncertainty present, it is hard to predict competitor and customer reaction. Similarly, we
are frequently uncertain how regulators will view a firm. Will its products pass regulatory scrutiny, will licenses be forthcoming, and will legal challenges be met?
These uncertainties are barriers to entrepreneurship for some people, because they greatly increase anxiety about the future. But entrepreneurs bear this uncertainty. They can
manage it as well as the concurrent risks.28
Entrepreneurs definitely take risks, which means that they engage in activity that
leads to very variable outcomes. For example, a study of Canadian inventor-entrepreneurs showed that of 1,091 inventions, only 75 reached the market. Six of these earned
returns above 1400 percent while 45 others lost money. (All of the non-commercial
inventions lost money for the inventors as well.) William Baumol, famed economist of
both Princeton and New York Universities, believes that people who take risks like this
must have a “touch of madness.” Baumol has spent decades trying to integrate the entrepreneur into a theory of rational economics, but madness and rationality are incompatible so far.29 Entrepreneurship is “economics with imagination.”30
Two conditions must exist for entrepreneurship to flourish. First, there must be freedom—freedom to establish an economic venture, and freedom to be creative and innovative with that enterprise. Second, there must be prosperity—favorable economic
conditions that give an entrepreneurial organization the opportunity to gain and grow.

Economic Growth and Freedom
Entrepreneurship is a global phenomenon. Therefore, it is vital that the prospective
entrepreneur understand the relationship between the country in which the business will
be located and the climate for business success. The Heritage Foundation and The Wall
Street Journal publish an annual “Index of Economic Freedom.” The index examines the
trade policies, taxation levels, government intervention and regulation, monetary policies, and six other categories of over 150 countries. Data from all the years that these
rankings have been made are available online at http://www.heritage.org/research/features/index/. The 2007 rankings show that once again Hong Kong is number one

A Framework for Entrepreneurship 13

despite the 1997 return of Hong Kong to the People’s Republic of China under the “one
country–two systems” formula. Other countries in the top of the rankings of “free”
economies are (in order): Singapore, Australia, United States, New Zealand, United
Kingdom, Ireland, Luxembourg, Switzerland, and Canada. The seven countries with
the lowest rankings and categorized as “repressed” were: North Korea, Cuba, Libya,
Burma and Turkmenistan.
Data collected by the index support several conclusions that are important for entrepreneurs and the study of entrepreneurship. First, the study indicates the strong correlation between a high level of economic and political freedom and a high standard of
living. Second, a comparison of data over several years indicates that as wealthy countries become richer, they often impose fiscal restrictions that reduce economic freedom,
such as higher taxation and social welfare programs. This is why the relatively well-off
countries in Scandinavia and Western Europe are mostly missing from the top 10 list.
The poorest countries are poor because of the lack of economic freedom, not because of
a lack of aid from richer countries or a lack of natural resources.31 Some of these poor
countries are now the targets of social entrepreneurs who are trying to jumpstart economic growth from the perspective of feeding the poor or treating and preventing
Two examples from formerly communist economies illustrate how important economic freedom can be to entrepreneurship. After years of exile in France, Anoa DussolPerran returned to her native Vietnam to open a passenger-helicopter service in Hanoi.
To avoid a possible three-year wait for government approval, Ms. Dussol-Perran
attempted to smuggle her first helicopter into Vietnam without filing the proper paperwork. The helicopter was discovered and impounded by the Vietnamese government. It
was released to Ms. Dussol-Perran only after a long wait, followed by a grueling six-hour
interview. When the time came to add a second helicopter to her service, Ms. DussolPerran elected to fly the new equipment from Paris to Hanoi herself rather than risk
importing another machine.32
In contrast, Jake Weinstock and his two partners have enjoyed relatively smooth sailing as they set up Gold’s Gym franchise in Moscow. Although Russia (#122) is still
ranked as mostly unfree in the Index of Economic Freedom, it did place 20 slots above
Vietnam (#142) in the 2006 survey. Weinstock was able to avoid customs problems
with his imported equipment—reportedly the toughest hurdle for new businesses in
Russia—by letting his Russian partner, a former athlete and sporting goods trader, handle those negotiations. He was also able to avoid the organized crime threats that plague
other foreign businesses. “We built up many relationships and alliances, which meant we
were less susceptible to shakedowns,” explains Weinstock. “We made sure important
people were interested in our success.”33
Yet even in the “free” United States, entrepreneurs can run into problems concerning
their economic freedom. . Consider the case of Andrew Beebee. Beebee is an Internet
entrepreneur who started his dot.com in the largely Hispanic Mission district of San
Francisco. He signed a five-year lease for five floors of a nine-story building when his
business began to skyrocket. When Beebee moved in, his landlord told many of the
other tenants that they would not have their leases renewed due to asbestos removal and

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